Safest High-Yielding Dividend Stocks
In this edition of State of the Market, Marc Lichtenfeld reviews three of the safest high-yielding dividend stocks available.
Hi everyone Marc Lichtenfeld, Chief Income Strategist with The Oxford Club. Welcome to State of the Market. I want to start off by thanking the 2,000 plus of you who have subscribed to this channel. I’m glad you find the content useful so thank you very much.
You know last week we talked about the highest dividend yields in the market. And I said that size didn’t matter when it came to dividend yields, because what difference did it make if you had a 20, 30 or 40% dividend yield, if the dividend just got cut or even suspended. Well we know that dividend size does matter for income investors. I mean you’re not going to invest in a dividend stock for a one percent yield, if you need the income. You might for other reasons if you think that the stocks going to go higher or if it’s a growth company. But if you’re investing for dividend income, you do want to see a sizable dividend.
So today we are going to look at the safest high-yielding dividend stocks out there.
Safest High-Yielding Dividend Stocks
So again last week there were some really high dividend yields that were unsafe. Today we’re going to look at the safe ones. So before i get to the three safest stocks that are high yielding, I want to talk a little bit about what I look for when it comes to dividend safety.
So the first thing that’s really important is I want to see a company that has sufficient cash flow to pay the dividend. Now notice I didn’t say earnings. There’s a big difference. Earnings has all kinds of non-cash items in its formulation or in its calculation. Cash flow is really representative of just the cash that came into the company. So, here’s a very brief example…
Let’s say a company records a big sale on December 30. They sell a million dollars worth of widgets. They can book that sale and include it as revenue, which trickles down to earnings on their year-end results. But they may not have even sent out an invoice yet or even been paid. So their revenue and earnings go up even though they haven’t taken in any more cash.
Now next year when they send out that invoice, maybe that customer returns the item or maybe it goes bankrupt, or it’s just taking a long time to pay. So we as dividend investors are really only concerned with the cash that comes into the company, because it’s the cash that’s going to pay the dividend, not earnings.
Long Track Record of a Reliable Dividend with No Cuts
The other thing I look for that’s really important is a company that has a long track record of a reliable dividend, that hasn’t cut the dividend. And preferably a stock that has raised the dividend every single year. So a perfect example of that is Pepsico. This week Pepsico raised the dividend for the 48th year in a row. So that sets the bar pretty high for investors that they can expect a dividend increase every single year.
So what do you think would happen if Pepsi (after 48 years) suddenly cut the dividend or suspended it altogether? I think at the shareholder meeting you would have people showing up with pitchforks and torches. So track record is also a pretty good indicator. It’s not a guarantee that the dividend is safe, but it’s a pretty good signal that it is.
All right enough of this jibber jabber… let’s get to the three Safest High-Yielding Dividend Stocks.
3 Safest High-Yielding Dividend Stocks
1. Enterprise Products Partners L.P. (NYSE: EPD)
The first one is a master limited partnership or MLP. This is typically a pipeline company for oil and gas. And that’s what this company does.
It just raised it’s dividend to $1.78 per share annually, and that comes out to a whopping 10.7% yield. It’s raised this dividend every year for 15 years in a row. Now over the past 12 months, Enterprise Products Partners has only paid out 49% of its cash flow and dividends. So it’s generated twice as much cash as it pays out in dividend. So that gives us a nice buffer in case things get tough. Which it is for many companies during this crisis. So that low payout ratio is why I’m confident that although the yield is double digits, it’s actually quite safe.
2. Preferred Apartment Communities Inc. (NYSE: APTS)
Alright, the next safe high-yielding dividend stock is Preferred Apartments. This is a real estate investment trust or a REIT. It owns 101 apartment buildings and shopping centers, mostly in the southeast. And many of those shopping centers are anchored by Publix, which is a very strong and healthy supermarket chain. Now Preferred Apartments has a 7.9% yield and REITs use a measure of cash flow called funds from operations or FFO. And often REITs will pay out all of their FFO in dividends…100%. Preferred apartments does not. In 2019 it generated 62 million dollars in FFO, while only paying out 44 million in dividends. So again it generates plenty of cash to pay that dividend.
Now it has raised the dividend every year since 2012 and never cut it since it started paying one the year prior. So it has a while to go before it’s in the same league as Pepsi, but it’s off to a pretty good start. Now typically the highest yielding stocks in the market will be MLPS and REITs, like we just talked about. But I also wanted to include a regular company, a “C” corporation. One that’s not a REIT or an MLP.
So the safest high-yielding dividend stock that’s not a REIT or MLP that I’ve found is…
3. People’s United Financial, Inc. (Nasdaq: PBCT)
6.2% yield. It’s just raised the dividend for the 27th straight year. So 27 years ago it started raising dividends. That’s a long time ago. Just to show you how long ago that was…you know what the number one song was 27 years ago? “The Sign” by those ABBA wannabes Ace of Base. I mean two men and two women from Sweden singing catchy pop songs…we get it. But they’ll never be ABBA. They couldn’t carry their one piece jumpsuits. They’ll never be Sweden’s most beloved super group…never.
Back to People’s United. People’s United net interest income was 1.47 Billion Dollars. And it paid out just 280 million dollars in dividends. Now when it comes to banks…net interest income is what we look at as a form of cash flow. So again, plenty of cash flow and it has paid out far less of its cash flow in dividends than it takes in. So again, that shows us that the dividend is rock solid. It will have the staying power of ABBA, not like those pretenders Ace of Base.
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About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. Marc captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.